Barely a month ago, we described the PA/NJ Reciprocal Income Tax Agreement (Agreement), pursuant to which employers in Pennsylvania and New Jersey were excused from withholding income tax from employees who live in one state but work in the other. In February, Gov. Christie ordered the state’s Treasurer and Acting Attorney General to determine what it would take to withdraw from the Agreement, and now has actually done so.

It is no secret that the Garden State has fallen on hard times and needs the revenue, despite already collecting a significant amount of tax revenue. For instance, its property taxes are among the highest in the country, it levies both an inheritance tax and an estate tax, and it maintains some of the worst-structured individual income taxes in the country, all reasons that the Tax Foundation gave for ranking New Jersey dead last in its 2016 State Business Tax Climate Index.

Pointing out that Pennsylvanians will have to pay for Gov. Christie’s bad habits, Reason.com, a monthly print magazine of "free minds and free markets,” asserted that New Jersey’s problem is not revenue, it is spending, which has increased almost every year during Gov. Christie's administration. In 2010, when Gov. Christie was first elected, the budget called for $29 billion of spending, while the most recent budget calls for $34.5 billion.

The magazine explained that the governor blames these increases on the pension problem. Unfunded obligations total more than $80 billion, and mandatory state bond disclosures reveal that the two main retirement funds could be completely out of money by the mid-2020s. In February of 2015, Reuters reported that Gov. Christie, who had tried to reduce contributions to the pension fund, was thwarted by a judge in a case brought by the AFL-CIO union, among others. In her opinion striking down the plan, the judge criticized the Governor for trying to “simply walk away from [New Jersey’s] financial obligations, especially when those obligations were the State’s own creation.”

While acknowledging that New Jersey's pension crisis existed before Gov. Christie took office, and will remain after he leaves, Reason.com disparaged his penchant for handing out tax breaks to dozens of companies, in the amount of $1.57 billion, to firms like Panasonic, Goya Foods, and Prudential Insurance. This was under the Urban Transit Hub Tax Credit Program, an economic development initiative that stopped taking applications in September of 2013. The New Jersey Policy Perspective denounced such arrangements in a September 2015 report titled Corporate Subsidy Overhaul Taking New Jersey Further Down a Dangerous Path, which we detailed shortly after it came out.

As for the reciprocity agreement, Philly.com noted that its termination triggered immediate scorn from Pennsylvania’s Gov. Wolf, who accused the New Jersey governor of “err[ing] significantly in his decision to unnecessarily punish 125,000 Pennsylvanians and cost the commonwealth $5 million annually." Those Pennsylvanians who work in New Jersey will soon be subject to tax brackets ranging from 1.4 percent for those earning $20,000 or less, to 8.97 percent for income greater than $500,000.

Beyond the burden of additional paperwork stemming from the need to file two sets of returns, South Jersey residents who work in Philadelphia will lose their wage tax credit, which is 3.47 percent for nonresidents. It was permissible to claim this credit under New Jersey law, but Pennsylvania prohibits it.

NJ.com quoted New Jersey’s Senate President, who heaped on more criticism with his opinion that “[t]his is the wrong decision for our state…The burden falls completely on working families in New Jersey, especially those in South Jersey who work in Philadelphia.” The withdrawal will be effective January 1, 2017.

DAVID KALL

DAVID EBERSOLE

I am a recognized tax advisor who takes a team approach to working with clients to achieve business goals. I leverage my public sector background to understand all perspectives and leave no tax planning or tax controversy stone unturned.